In this article we will describe how, in cross-border energy projects, one advisable solution includes, among other aspects, the implementation of intergovernmental project agreements (that is, contracts between two or more government agencies that unites and coordinates them under terms and conditions to achieve a common goal) as a useful legal tool of harmonisation to align complex interests and issues, all.
Energy projects are commonly considered under the umbrella of nationalistic, national security, sovereignty and strategic areas’ protection rationales of host countries and, consequently, intergovernmental agreements, when properly implemented, are a legal safety net to help align governmental policies with the project’s objectives assuring that the project itself is not adversely affected by changes in national policies or legal and regulatory frameworks. This scenario is unfortunately common in several countries, including Latin American jurisdictions.
Obviously, protection from bilateral investment treaties and dispute resolutions mechanisms and provisions on international treaties are and shall be in place, but all stakeholders, including relevant final users, authorities, agencies, clients and communities, shall be involved to establish a ‘win-win perspective’ and accomplish durable benefits and continuity of the project.
In addition, in federation-oriented countries, multi-level (Federal, State and Municipal) government coordination mechanisms shall be effectively enacted to facilitate positive involvement of all multi-level public, social and private stakeholders. Those mechanisms are generally implemented precisely through intergovernmental agreements which shall complement, never substitute, all legal approvals, permits, authorisations, licenses and decrees, including in many projects, local Congress’ authorisations to assure the validity and permanence of bidding process, awards, permits and, perhaps more important, the allocation of public financial resources as needed for payment and guarantees during different (again, Federal, State of Municipal) administrations.
Of course, each cross-border energy project must be implemented and understood under a case-by-case analysis, but surely, we can define common points of review for all cases. As such, a clear definition of risks and even more importantly, legal risk-mitigation strategies are paramount. The level of success in the implementation of such strategies will define the level of general legal strength and protection and, with that, the final bankability of the project and financial costs.
Among the main aspects to consider:
Jurisdictional Issues: Different legal systems and regulations create different conflicts and complexities. Understanding local key legal aspects by local experienced counsel will avoid potential misunderstandings of concepts both regarding hard and soft law issues. In some countries, cultural and social aspects might affect the way legal frameworks are locally understood. This is not a minor issue. When feasible, understanding and harmonising these laws and cultural nuances is essential for a smooth project execution and operation. Obviously, the use of international templates such as FIDIC is a fantastic way to reach such harmonisation, but on a local contractual level, this might not be sufficient and thus, several provisions should be considered to foresee legislative changes affecting all stages of energy projects, including change of laws and even Governmental force Majeure clauses (namely, the inaction from authorities in granting licenses or permits even when proper, legal and timely actions were taken by private investors).
Jurisdictional clauses shall be ideally crafted to separate technical issues from legal ones and even better, through multi-level stages on each of them. This will assure an effective way to address disputes in favour of the continuity and conclusion of the project through the avoidance of mixing different aspects that would be better solved through technical and timely efficient mechanisms, instead of time consuming and potentially expensive legal ones.
International Treaties and Agreements: As previously said, understanding the international framework in place on the host country and legal safety nets is necessary for an effective risk mitigation strategy. Clearly, no one looks to fall into an international investment protection dispute in an international energy project, but a timely understanding of schedules, conditions and local host country status and recognition of international treaties, constitutes a healthy legal preventive practice. Obviously, the Constitutional approach from host countries towards enforcement of international awards is fundamental, including a legal research about previous cases and the level of respect from such local governments to international commitments. This is particularly important when an international decision awards financial penalties or consequential losses to one party or to host country. The legal local precedents regarding similar cases are fundamental to understand previous examples and assess the level of risk of a feasible failure from host countries to comply with such awards.
Political and Sovereignty Concerns: Cross-border energy projects can raise political issues, as countries may fear losing sovereignty or control over their infrastructure and natural resources. Confidence-building measures and strong leadership are necessary to mitigate these concerns. No small amount of cases can be found, in which this aspect negatively affected energy projects. On the other hand, political momentum is different in each country. While some countries have strong institutional frameworks and political swifts have almost no impact on the continuity of Federal policies, some others are generally affected even with a slight political change. Understanding the momentum and the strength of institutions during such political changes will protect investments. In some countries, public counterparties of private investors (in a PPP for instance or when the government acts as a final user or sole purchaser or sole provider), the legal nature of such public counterparty might be considered either as an authority or as an ‘equal’ private entity. This is especially relevant when assessing the layers of legal protections and courts that can be triggered by private stakeholders if such public entity breaches its contractual obligations. Not all public entities has the same legal status in all contractual relationships. This is especially true in some Latin American countries.
Economic and Financial Factors: The allocation of resources and the distribution of costs and benefits can be contentious. Ensuring that all stakeholders, including host countries, benefit from the project, is crucial. Several schemes are designed in different ways to achieve a balanced allocation of risks (depending if we are before a concession scheme, licence, joint investment or PPP). On the other hand, duress and financial stress should be addressed and foreseen in a way to obtain sufficient guarantees from both parties. In some jurisdictions, where local governments are involved as counterparties and not only as authorities, there might be unforeseen political or legal restrictions on the availability and access to public funds and sovereign or sub-sovereign guarantees from such public parties. In such cases, legislative approvals and sometimes-even amendments to some laws might be needed to secure multi annual financial recourse. In such cases, intergovernmental agreements increase their value as an additional protective legal layer.
Technical and Environmental Considerations: Technical challenges, such as differing standards and environmental regulations, must be addressed to ensure an energy project's feasibility and sustainability. As in any other project, technical due diligences will be needed to assess visibility, risk and mitigation on such technical standards. Among such aspects, local and national official standards, archaeological surveys, rights of way, environmental impact studies, social studies and Municipal approvals and more recently, indigenous studies or agrarian communities’ consensus certificates might be needed in several countries in Latin America. Local and public awareness and information of the project has become increasingly important since some countries have adopted ‘Social Impact’ studies as a fundamental preliminary requirement for further licenses or permits. To such end, the legal draft of a Permits’ Gantt dossier is highly advisable to detect the legal stages and different regulatory connections within all authorisations’ process. Again, such schedule should be considered part of the intergovernmental agreement.
Institutional and Coordination Issues: Effective coordination between Federal, State and Municipal governments, as well as among various stakeholders, is essential for the successful implementation of cross-border energy projects. This is achieved through a governmental relations’ strategy, which of course, ought to be aligned with all local anti-corruption laws and international standards. Not doing so will affect not only the prestige of the parties, but will potentially raise legal opposition against the projects’ continuity and of course, will trigger legal and even criminal actions against all those involved. Additionally, a complete relevant market entry legal assessment will also be needed, which is not different to a specific energy sector regulatory diligence to understand price components, national contents, market barriers, enforceability of awarding tender processes and local public procurement rules.
All these basic legal aspects and concerns highlights the need of a robust legal and regulatory frameworks to facilitate cooperation, mitigate risks, and promote effective development in cross-border energy projects. Needless to say that a tailor-made assessment should be made on the deep knowledge of the specific markets. For instance, for a 900 MW combined-cycle project with exactly the same technology and EPC providers, stakeholders concerns will be radically different if implemented in Turkey or in Mexico. Those two countries might share to some extent legal, idiosyncratic, political, institutional, governmental, social, market and even economic similarities, but a copy-paste implementation process, would be a huge mistake.
In summary, all these aspects, once properly assessed by a cross-border legal team, should be part of any serious legal due diligence report for any energy project, but also, it would be advisable to include them on an intergovernmental agreement. Depending on Federal, State and/or Municipal rulings of the specific host country, it even would be advisable to look for the approval and enactment of a Legislative act or decree and, with that, to create an additional layer of protection to the long-term energy project itself.
Please do not hesitate to contact Claudio Rodriguez for further information.
